Measurement of the elements of financial statements29/08/2022 0 By indiafreenotes
The financial position of an enterprise is primarily provided in a balance sheet. The main purpose of financial statements is to provide financial information to the users to assist them in their economic decisions. The financial statements basically present the financial information in such form that it is not only understandable but also useable. That is why financial statements present the financial effects of different business events that also includes business transactions.
In order to enhance the quality of information in financial statements, business transactions are grouped in different classes or categories on the basis of their economic characteristics. The broad classes or categories are called elements of financial statements.
The elements of a balance sheet or the elements that measure the financial position are as follows:
Asset: An asset is a resource:
- Controlled by the enterprise as a result of past events, and
- From which future economic benefits are expected to flow to the enterprise.
Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise’ resources, i.e., assets.
Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities. Equity is also known as owner’s equity.
The financial performance of an enterprise is primarily provided in an income statement or profit and loss account. The elements of an income statement or the elements that measure the financial performance are as follows:
- Increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or
- Decrease of liabilities that result in increases in equity.
However, it does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders.
- Decreases in economic benefits during an accounting period in the form of outflows, or
- Depletions of assets or incurrences of liabilities that result in decreases in equity.
Measurement of the Elements of Financial Statements
According to the Framework of IAS, the term ‘measurement’ has been defined in the following words:
“Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement.”
There are a number of measurement basis that are employed in different degrees and in varying combinations in financial statements. They are listed below:
- Historical cost: Historical cost is the most common measurement basis adopted by enterprises in preparing their financial statements. This is usually combined with other measurement basis, such as current cost basis, realisable basis, etc., which are discussed later in this section. Under historical cost measurement basis, assets are originally recorded at their costs or purchasing price or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation.
- Current cost: Under current cost basis, assets are carried at the amount of cash that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligations currently.
- Realisable value: Assets are carried at the amount of cash that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amount of cash expected to be paid or satisfy the liabilities in the normal course of business.
- Present value: Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the presented discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.
- Click to share on Twitter (Opens in new window)
- Click to share on Facebook (Opens in new window)
- Click to share on WhatsApp (Opens in new window)
- Click to share on Telegram (Opens in new window)
- Click to email a link to a friend (Opens in new window)
- Click to share on Reddit (Opens in new window)
- Click to share on Pocket (Opens in new window)
- Click to share on Pinterest (Opens in new window)